Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Courses
  • Home
  • Economics, Finance, & Analytics
  • Investments, Trading, and Financial Markets

Call Swaption - Explained

What is a Call Swaption?

Written by Jason Gordon

Updated at April 17th, 2022

Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Marketing, Advertising, Sales & PR
    Principles of Marketing Sales Advertising Public Relations SEO, Social Media, Direct Marketing
  • Accounting, Taxation, and Reporting
    Managerial & Financial Accounting & Reporting Business Taxation
  • Professionalism & Career Development
  • Law, Transactions, & Risk Management
    Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
  • Business Management & Operations
    Operations, Project, & Supply Chain Management Strategy, Entrepreneurship, & Innovation Business Ethics & Social Responsibility Global Business, International Law & Relations Business Communications & Negotiation Management, Leadership, & Organizational Behavior
  • Economics, Finance, & Analytics
    Economic Analysis & Monetary Policy Research, Quantitative Analysis, & Decision Science Investments, Trading, and Financial Markets Banking, Lending, and Credit Industry Business Finance, Personal Finance, and Valuation Principles
  • Courses
+ More

Table of Contents

What is a Call Swaption?How Does a Call Swaption Work?Call Swaption ConsiderationsPut SwaptionsAcademic Research on Call swaption

What is a Call Swaption?

A swap agreement refers to a contract that allows two individuals or parties exchange or swap financial instruments. This exchange is with the aim of attending to the different needs of both parties. In a call option, a call swaption gives its holder, usually a buyer the right to make a swap agreement with another party as the floating payer and the receiver of the fixed rate in the contract. A call swaption is also called a receiver swaption. Holders of a call swaption are not under any obligation to enter such agreements, rather, it is a right which they might choose to exercise or otherwise.

Back to:INVESTMENTS & TRADING

How Does a Call Swaption Work?

There are two types of swaptions, they are call swaption and put swaption. A call swaption is also a receiver swaption while a put swaption is a payer swaption. Swaptions are not standardized agreements or contracts, all swaptions are done over-the-counter (OTC). Just like options, there are certain terms that parties must agree to in a swaption. Swaptions also have their strike price, expiration date and other terms contained in the agreement such as the notional amount, fixed and floating rates. Also, expiration style for swaptions differ from place to place. We have the American, Bermudan and European styles which have different features.

Call Swaption Considerations

In a call swaption, the holder of the right needs to agree to be the floating rate payer and fixed rate receiver in the swap agreement. That means that the holder of this type of swaption exchanges its fixed-rate liability for a floating-rate liability. Hence, he pays a floating rate to the other party and receives a fixed rate from the same party. Buyers of call swaptions enter into an agreement with the aim of hedging against a potential decline in interest rates.

Put Swaptions

A put swaption is the opposite of a call swaption. In this swap agreement, the holder of a put swaption pays the fixed rate and receives a floating rate. Individuals or institutions that go for this swaption do so with the perception that the interest rate of the option will likely increase. Hence, they agree to pay the fixed rate to the call swaption holder in exchange for the likely profit they will realize when the floating interest rates increase.

call swaption

Was this article helpful?

Yes
No

Related Articles

  • Churning (Investor) - Explained
  • Hurdle Rate (Finance) - Explained
  • Presidential Election Cycle Theory - Explained
  • Systemic Risk - Explained



©2011-2021. The Business Professor, LLC.
  • Privacy

  • Questions

Definition by Author

0
0
Expand